A dilemma for free-marketeers: why is Austria doing so well?

Austria has most of the attributes we associate with economic sclerosis. It is a classic 'cartel democracy', in which the two big parties – the Reds and the Blacks – scrabble to find public sector positions for their supporters. The economy is run on corporatist lines, with ministers mediating deals between the employers' federation and the trade unions. Taxes are high – 44 per cent of GDP – and the state payroll is swollen, even by EU standards. Employment and social regulations are burdensome: Austria is the third most expensive place in the OECD to hire someone.

And yet – there's no getting around it – the Alpine republic is flourishing. Growth is respectable, unemployment is below five per cent, the quality of life excellent, and income per head the second-highest in the Euro-zone after Luxembourg. What, I ask myself, am I missing?

I spent the weekend putting that question to various natives: journalists, think-tankers, politicians and (in both senses) Austrian economists. They were conveniently gathered in Vienna for the Tenth European Resource Bank – the annual get-together for free-market and sound-money campaigners from all over the old continent. (Many thanks, by the way, to the Hayek Institute, this year's host organisation, and to its heroic director Barbara Kolm. As the poet says: 'How far that little candle throws his beams.')

'What's your secret?' I kept asking. Local libertarians were at a loss to answer, and fell back – as libertarians often do, I find – on prophesying a terrible meltdown.

Here, for what it's worth, are the various explanations that were eventually proffered. All of them strike me as true enough, but none as sufficient to explain the economic disparity between Austria and its EU neighbours.

1.Culture. Austrians are said to be hard-working, and so they are, but this doesn't get us very far. When we talk of 'culture', it's really a shorthand for 'the aggregate responses of individuals to local circumstances'. Making work pay creates a 'culture' of industriousness; penalising success creates a 'culture' of shiftlessness. Culture can endure following the alteration of incentives, but not indefinitely. It has been decades since the Austrian economy was geared to reward productivity.

2. Neutrality. After the Second World War, Austria was at first garrisoned by Allied troops and then, following an agreement between the Western powers and the Soviet Union, demilitarised. Neighbouring states had to spend a chunk of their budgets on defence; Austria was free to use the money for civil programmes or tax cuts. At the same time, the country was a member of EFTA rather than of the EU – which usually correlates with greater wealth.

3. Geography. The fall of communism led to dizzying growth in the former Warsaw Pact states, which Austria was especially well-placed to exploit. Proximity, neutrality and history had made Austrians familiar with these places during the Cold War. After 1990, Austrian banks and businesses rushed to establish themselves throughout the former Habsburg lands while other Western companies were still putting their boots on.

4. Education. A biggie, this one. Austrian children are able to leave full-time school at 14 and learn a craft, while attending occasional lessons. They are thus equipped for the world of work in the way that, say, sociology graduates are not. I've blogged before about the way Britain's education system can leave 16-year-olds unable to give correct change from a £5 note. While the Austrian system is by no means perfect – you need to hire a plumber to put in your pipes, then a boilerman to hook up your boiler, then an electrician to connect the wires – it does at least prepare school leavers for a range of manufacturing and service jobs.

5. Size. Austria benefits from small-state advantage. As small states go, it is also relatively decentralised, with a devolved federal structure.

These are all genuine advantages, but does any of them really outweigh the cost of Euro-corporatism?

I wondered briefly whether I was suffering from cognitive dissonance. Faced with a fact that challenged my belief-system, I was questioning the fact rather than the belief-system. Could it be that I was simply wrong about free markets? Might social democracy, after all, be the key to prosperity? Not according to other data. Look at any continent, at any moment in the past century, and you'll find an overwhelming correlation between open markets, secure property rights, low taxes and high living standards. It's Austria that's the outlier here, not Switzerland.

So let me crowd-source the question (as I've already done , unsuccessfully, on Twitter). Someone out there must be sitting on the answer. Why is Austria doing so well?